Don't fall in love with bonds now

There are a lot of reasons to like the long end of the U.S. Treasury curve. Lower projected equilibrium real GDP growth potential as well as long sustained moderate inflation expectations give ample reason for continued low long yields. Fed purchases as well as weaker economic reports in Q1 were also supportive. Currently however economic reports have been more upbeat, the Fed is purchasing fewer Treasuries following each meeting and PPI and CPI data came out higher than expected last week.

Still, The June bond futures (CBOT:USM14) traded higher today to finish slightly higher on the day. The contract fell hard on Thursday as did the balance of the curve, the long end holding up relatively better. Then on Monday, the contract fell slightly further, possibly as traders took profit on flattening trades. Today’s recovery at first glance looks inviting, but it may not be enough to suggest further gains this week.

Technically speaking, the contract made a new high early last week, but failed to hold onto those gains. The push higher failed an upward sloping trend line dating from early-February and the new high brought negative divergence in 14-day RSI.

Since, the contract formed a bearish hanging man on Wednesday, a ‘bearish engulfing’ on Wednesday/Thursday, a bearish ‘shooting star’ on Monday and today forms a bearish ‘hanging man’. All of these candlestick patterns suggest further selling pressure. Today’s hanging man has obviously not been confirmed yet, but we are encouraged by the inability to recover any more of the sell-off from Thursday.

Bonds will outperform 5-year on a relative basis over the next year, but that will be with both yields climbing. They will not move lock step, but they are both headed in the same general direction.